<p>SBA lending to small business is down by more than 57%. Conventional lending to small business has virtually disappeared and now with this new change it is estimated that at least 70% of business acquisition lending would no longer qualify for an SBA loan guarantee.&nbsp; The conclusion of some SBA officials is that business acquisition transactions have a higher default ratio than start-ups.</p> <p>The trouble is with "Goodwill" and it is critical your deal/loan be structured intelligently when the buyer seeks his or her bank financing.&nbsp;</p> <p>Here is the change: SBA SOP 50 10 5(A),&nbsp;effective March 1, 2009:</p> <p>Goodwill:&nbsp;(1) If the purchase price of the business includes goodwill (or "blue sky"), the lender should explore seller-financing with a subordinate lien to the SBA-guaranteed loan.&nbsp;&nbsp;(2) The lender may finance a limited amount of goodwill.&nbsp; In no event may the amount of goodwill financed by an SBA guaranteed loan exceed 50% of the loan amount up to a maximum of $250,000.</p> <p>Let's analyze a business with $400,000 in cash flow as being sold for $1.1 million which required $100,000 in closing costs and working capital. The assets are office furniture and office equipment, which might appraise for say, $50,000. The goodwill here is $1,050,000. So the maximum SBA loan is limited to $250,000 for Goodwill, and the $150,000 for equipment and closing costs/working capital, or $400,000.&nbsp; Enter a very large seller carry if you want to sell your business.</p> <p>There is no special cap placed on the closing costs, working capital, equipment, real estate and inventory.</p> <p>Here is an example of a transaction and explanation of what could be financed for this transaction:&nbsp;</p> <p>Assume a small manufacturing business has $340,000 in stable cash flow, and is being sold for $1.1 million. Included in the sale is $150,000 in equipment, $100,000 in inventory, and $300,000 in the real estate. A qualified buyer needs an additional $100,000 for closing costs and working capital. The total project is $1.2 million, and the goodwill is $550,000. If Mr. or Mrs. Buyer was injecting the normal 20% of the total transaction, or $240,000, and the seller will finance (at a ten year term) 10% or $120,000, the SBA lender could then finance the balance of the $840,000. They could do this, even though the Goodwill is over $500,000. That is because they could allocate the loan proceeds as follows: Real Estate: $300,000, Inventory, $100,000, Equipment $150,000, Closing Costs/Working Capital, $100,000 and Goodwill, $190,000. As long as the loan proceeds are less than 50% of the goodwill, but not greater than $250,000 it still meets SOP requirements.</p> <p>This Goodwill Cap prevents transactions that may save and/or create jobs in the economy.&nbsp; Without a viable exit strategy, individuals will be less motivated to take risks and either acquire a company or start new businesses or franchises.&nbsp;Small business represents 50% of the existing jobs in this country and 70% of new job creation. Small business is also the largest consumer of the products and services of big business.</p> <p>The SBA is studying the impact of their decision until August 1, 2009 because they enacted this change without data specifically identifying goodwill in business acquisitions&nbsp;(by their own admission).&nbsp;Just seemed like a good idea.</p> <p>Many lenders, the&nbsp; International Franchise Association&nbsp;&nbsp;&nbsp;(IFA)&nbsp;,&nbsp;&nbsp;National Association of Government Guaranteed Lenders &nbsp;(NAGGL)&nbsp; and others are challenging the SBA on this, directly and through respective Senators and Representatives.</p> <p>Hopefully the SBA will change its mind.&nbsp; For now, it stands.</p> <p>I highly&nbsp;recommend business owners start as early as possible thinking about their exit strategy and their financial needs after they sell their business, and, definitely have a business selling team of a certified business broker or intermediary, a CPA and an attorney with business transfer experience when they are ready to sell.&nbsp;</p> <p>&nbsp;</p> 2009-03-07T04:14:31Z 2009-03-13T19:17:04Z -10.4613 364 3489 true 13 24830 selling-your-business-just-got-a-whole-lot-tougher 3 2009-03-13T19:17:00Z 2009-03-13T19:17:04Z

The SBA just significantly tightened its rules on guarantees for business acquisition loans. Prepare yourself for carrying some of the loan via promisory note or seller carry for the buyer and of course subordinate to a bank's first position.

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